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Space Science Digital > Blog > News > Investors in space startups see hurdles in defense market
News

Investors in space startups see hurdles in defense market

By Jayden Hanson March 6, 2023 6 Min Read
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WASHINGTON — In the procurement of space launch services, DoD has come a long way from a decade ago when SpaceX sued the Air Force to be allowed to compete for national security launches. The Space Force now plans to open up the next round of launch procurements to a broad range of commercial players.

But in other sectors of the space industry, emerging technologies from startups don’t stand much of a chance to be part of a DoD program due to institutional and cultural barriers, said Jordan Noone, co-founder and general partner of Embedded Ventures, a Los Angeles-based firm that invests in aerospace and defense startups.

Amid the infusion of venture capital into the space industry, U.S. defense officials have called for faster adoption of commercial technology in military programs. But that is not likely to happen in the short run due to ingrained barriers in the military procurement system, said Noone, a co-founder of Relativity Space. He formed Embedded Ventures in 2020 with co-founder Jenna Bryant. 

Those hurdles persist even though DoD and the Department of the Air Force have created several organizations — the Defense Innovation Unit, AFWERX and SpaceWERX — specifically to work with startups 

These entities mentor startups and fund research and development projects but are disconnected from the Space Systems Command’s procurement offices that manage major programs, Noone said in an interview. 

DIU, AFWERX and SpaceWERX operate almost completely independently and that makes it difficult for emerging technologies to migrate to so-called programs of record.

A key obstacle for startups is that DoD procurements ask for “prescriptive solutions,” meaning that they dictate specific components or subsystems, he said. That prevents many commercial companies from competing because they are optimized for “performance based” contracts that reward the most innovative solutions. 

Cooperative agreement with Space Force

With these concerns in mind, Embedded Ventures in 2021 signed a five-year agreement with SpaceWERX to facilitate dialogue. One of the goals of this partnership is to figure out the “commercial integration” problem, Noone said. If a technology is not in a program of record with a budget line item, “that is an Achilles heel to the entire commercial integration effort where we put years of effort and nothing comes out of it.”

The cooperative agreement so far has been helpful to enable these discussions, Noone said. But the reality is that the large program offices “still live behind the firewall that even SpaceWERX has not been able to break through terribly effectively.”

Embedded Ventures in January announced its inaugural $100 million fund intended to back companies with dual-use commercial and national security applications. To date the fund has announced investments in Akash Systems Inc., Chromatic 3D Materials, Inversion Space, KittyCAD, Slingshot Aerospace and Skyryse.

Companies and investors need more than virtue signaling, he said. Meanwhile, the U.S. national security sector is missing out on opportunities to integrate innovative technologies.

To help build its relationship with DoD, Noone hired Mandy Vaughn as operating partner of Embedded Ventures. Vaughn, CEO and founder of the consulting firm GXO Inc., is the former president of Virgin Orbit subsidiary VOX Space and serves on the National Space Council’s Users Advisory Committee.

Vaughn told SpaceNews that she is seeing inklings of change in the space procurement enterprise although not as fast as VCs would like.

“Part of the problem is just legacy,” she said. “It’s a lot of inertia. And the major systems and programs of record haven’t changed for a really long time.”

Program managers are not necessarily incentivized to bring in cutting-edge innovation, he said. Their duty is to “deliver cost, schedule and performance on those programs of record, which are tied to a congressional budget line.”

Under the cooperative agreement, said Vaughn, “what we’re trying to do is also educate the program executives” so they better understand the maturity of commercial technologies and figure out ways to insert them into programs as they go along.

Many of the top leaders of the Space Force and Space Systems Command are advocating for the adoption of venture-funded technology, she said. They are telling buyers to think less about “programs of record” and more about “mission areas” that could be accomplished with commercial products or services. 

“But that’s a long process,” Vaughn said. “It’s all still pretty formative.”

An example is a new Space Force initiative to use commercial space transportation systems and on-orbit logistics to support military operations. That would include using rockets  to deliver cargo, using space tugs to deliver satellites to nontraditional orbits and on-orbit tankers to refuel satellites. 

“This is awesome,” Vaughn said. “But where’s the budget wedge to help close the story, and the demand signal to help calibrate the investor community?”

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TAGGED: defense, hurdles, Investors, market, space, startups

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Jayden Hanson March 6, 2023
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